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Strengthening the IESBA's International Independence Standards—Proposed Revisions Relating to Non-Assurance Services and Fees

Diane Jules, Szilvia Sramko  | 

Introduction

The International Ethics Standards Board for Accountants’ (IESBA) proposed revisions to its non-assurance services (NAS) and fee-related provisions are focused on enhancing the Code’s International Independence Standards, especially those that apply to audit clients that are public interest entities (PIEs). The proposals respond to growing public perceptions about the need to reinforce auditor independence as well as specific concerns from the regulatory community and the Public Interest Oversight Board.

The Exposure Drafts

The two exposure drafts (EDs): Proposed Revisions to the Non-Assurance Services Provisions of the Code; and Proposed Revisions to the Fee-Related Provisions of the Code were released in January 2020. The EDs include proposed revisions to strengthen the non-assurance services (NAS) and fee-related independence provisions of the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code). 

In developing the EDs, the IESBA coordinated closely with the International Auditing and Assurance Standards Board (IAASB). The IESBA is strongly committed to continuing its engagement with the IAASB in finalizing the proposals.The IESBA’s Fees and NAS projects are linked and are therefore closely coordinated, particularly in relation to the proportion of fees for services other than audit to audit fees.

 To promote awareness of the EDs and to highlight the most significant revisions being proposed, the IESBA published two recorded webinars on its website in March 2020.

The EDs also include proposals that are intended to enhance transparency about NAS and fee-related matters for PIE audit clients. Both sets of proposals require improved firm communications with those charged with governance (TCWG), including audit committees. Such improved communications will help TCWG make more informed judgments and decisions about auditor independence.

Project on Definitions of Listed Entity and PIE

Many of the proposed revisions in the EDs apply to PIE audit clients. Some stakeholders believe that a clearer definition of PIE is needed in order for the NAS and fee-related proposals to be consistently applied. The IESBA also notes calls for the definition of a PIE in the Code to better delineate the differences between jurisdictional approaches and the approach taken in the Code.

Accordingly, the IESBA has accelerated the timeline for the IESBA’s strategic commitment to review the definition of the term “PIE” and has started a separate project in this regard. The plan is to have the revised NAS and fee-related provisions come into effect at the same time as the revised definition of PIE.

Highlights of the NAS ED

Informed by the feedback from four global roundtables held in 2018, the objective of the NAS project is to ensure that the NAS provisions remain robust and of high quality for global application, thereby increasing confidence in the independence of audit firms.

The NAS ED is supplemented by a staff-prepared mapping table of comparison to assist readers compare the proposals in the NAS ED to the extant provisions in Section 600, Provision of Non-assurance Services to an Audit Client. The extant overarching requirement that prohibit firms from assuming a management responsibility for an audit client is retained. Also, firms must continue to apply the conceptual framework to identify, evaluate and address threats to independence. Key revisions being proposed include:

  • A new prohibition on providing a NAS to an audit client that is a PIE if a self-review threat will be created in relation to the audit. This proposal is intended to address the risk of a firm auditing its own work. It is based on the premise that self-review threats created by providing a NAS to a PIE audit client cannot be eliminated, and safeguards are not capable of being applied to reduce them to an acceptable level.

A self-review threat is the threat that a firm will not appropriately evaluate the results of a previous judgment made or an activity performed by an individual within the firm as part of a NAS on which the audit team will rely when forming a judgment as part of an audit.

 

The ED includes proposed guidance to help firms determine whether the provision of a NAS will create a self-review threat. It involves determining whether there is a risk that: 

(a)The results of the NAS will affect the accounting records, internal controls over financial reporting, or the financial statements on which the firm will express an opinion; 

(b) In the course of the audit of those financial statements, the results of the NAS will be subject to audit procedures; and 

(c)When making an audit judgment, the audit team will evaluate or rely on any judgments made or activities performed by the firm or network firm in the course of providing the NAS.

  • Stricter prohibitions on the provision of certain types of NAS, especially for audit clients that are PIEs (.e.g., in relation to the provision of accounting and bookkeeping services; tax and corporate finance advice; litigation support services, such as acting as an expert witness).
    • The proposals clarify the situations in which the firm is prohibited from providing specific types of NAS. For example, the proposals explain that provision of advice and recommendations by a firm to an audit client might create a self-review threat. For PIE audit clients, the provision of such advice/ recommendations is prohibited if a self-review threat is identified. Provided that the threat to independence is addressed, firms may provide advice or recommendations to audit clients that are not PIEs. 
    • The proposals explain the circumstances in which certain types of NAS might be permissible. For example, within the subsections, new application material is added to indicate when a self-review threat will not be created with respect to the provision of advice and recommendations to audit clients.
        
  • Further tightening of the circumstances in which materiality may be considered in determining the permissibility of a NAS. Under the current Code, a firm may provide certain types of NAS to an audit client if the firm determines that the outcome or result of the NAS is immaterial to the financial statements. The NAS ED revises this approach. Specifically:
    • The materiality qualifier is withdrawn for PIE audit clients (i.e., the NAS self-review threat prohibition applies even if the outcome or result of the NAS is immaterial).
    • For all audit clients, the provision of tax or corporate finance services is prohibited if: (i) the effectiveness of that advice depends on an accounting treatment or presentation; and (ii) the audit team has doubts about the appropriateness of that treatment or presentation.

  • New requirements to improve firm communication with TCWG about NAS. With respect to PIE audit clients, the NAS proposals are intended to help guide the nature of information that firms should communicate with TCWG. The firm is required to provide TCWG with sufficient information to enable them to make an informed decision about the impact of the provision of such NAS on the firm’s independence. As part of such communications, in the case of PIE audit clients, the firm must: 
    • Obtain concurrence from TCWG for the provision of a NAS (i.e., obtain NAS pre-approval by TCWG). This approach allows maximum flexibility in terms of the process or manner in which the firm might obtain concurrence from TCWG. A firm and TCWG may put in place a process that is suitable for their circumstances.
    • Provide the firm’s conclusion that any threat to independence has been eliminated or that safeguards that the firm proposes to apply will reduce such threat to an acceptable level.

Highlights of the Fees ED

The Fees project is responsive to a public interest need for the IESBA to deal with fee-related matters, including those that impact, or are perceived to impact auditor independence. The Fees project was informed by extensive fact-finding, the summary of which was considered by the IESBA in June 2018.

The focus of the fee-related revisions is to enhance the fee-related provisions that apply to audit engagements. Accordingly, most of the proposed revisions are to Section 410, Fees. The proposals note that potential threats to independence need to be considered when fees for professional services are negotiated with and paid by the client. In this regard, the proposals include an explicit statement regarding the inherent self-interest threat to auditor independence in the audit client payer model.

Key revisions include:

  • A prohibition on firms allowing the audit fee to be influenced by the provision of services other than audit to the audit client. The proposal is not intended to specify the level of fee that a firm should charge its client – this is considered a business decision. However, the proposals clarify that the audit fee should be a standalone fee within the spectrum of total fees from the audit client. The fees for the provision of services other than audit should not influence the level of the audit fee.

  • In the case of PIE audit clients, a requirement to cease to act as auditor if fee dependency on the audit client continues beyond a specified period. The IESBA is of the view that fee-dependency on a PIE audit client cannot continue indefinitely even if a pre-issuance review continues to be a safeguard every year after the second year. This is because after a certain period of time, the fee dependency would become so persistent and fundamental that no safeguards would be capable of reducing the threats to an acceptable level. Under the proposals:
    •  A firm is required to cease to be the auditor of a PIE audit client if the fee dependency continues for more than five consecutive years. The proposals include an exception that might apply when there is a compelling reason with regard to the public interest, provided that certain criteria are met. The exemption is allowed only on an exceptional basis.
    • Firms are required to consult with and receive the concurrence of an independent regulatory body or professional body in the relevant jurisdiction before taking the exemption.

Some stakeholders believe that the fee-dependency proposals might raise issues with national anti-competition or anti-trust laws. In this regard, IESBA is seeking the views of professional bodies and regulators in particular about the operability of such a requirement within the framework of national laws and regulations.

  • Communication of fee-related information to TCWG and to the public to assist their judgments about auditor independence. In the case of PIE audit clients, the proposals require a firm to communicate:
    • The fees for audit and services other than audit. In addition, the communication to TCWG should include the firm’s assessment of the level of the threats to independence created and any actions the firm has taken or proposes to take to reduce threats created by fees to an acceptable level.
    • With respect to fee dependency, a statement about whether the total fees from the audit client will, or are likely to, exceed the 15 percent threshold. In case of communication with TCWG the firm should also communicate the actions taken to address the threats, and any proposal for the firm to continue as the auditor if the fee dependency continues beyond five consecutive years.

Transparency of certain fee-related information is of benefit to stakeholders as it helps inform judgments about a firm’s independence. Regarding communication of fee-related information to the public, firms will be allowed flexibility in terms of how to achieve such transparency. The Fees ED includes a principles-based proposal that require firms to ensure that certain fee-related information is made available publicly in a timely and accessible manner either by the audit client, or otherwise, by the firm.

  • New guidance to help firms identify, evaluate and address threats to independence created by fees. For example, the proposals include a requirement for the firm to determine whether a self-interest or an intimidation threat to independence is at an acceptable level before the firm or a network firm accepts an audit or any other engagement.  

How to Comment?

Comment on the NAS and Fees EDs may be submitted by visiting the IESBA’s website. The deadline for comments is June 4, 2020 – extended by a month from the original May 4, 2020 deadline to provide additional time to stakeholders who are experiencing disruptions caused by the COVID-19 pandemic.

All stakeholders are encouraged to comment, including investors and other users of financial statements; audit committees and others in corporate governance; regulators and audit oversight authorities; preparers; firms; national standard setters; professional accountancy organizations; academics and educators.


About the IESBA

The International Ethics Standards Board for Accountants® (IESBA®) is an independent global standard setting board. The IESBA’s mission is to serve the public interest by setting ethics standards, including auditor independence requirements, which seek to raise the bar for ethical conduct and practice for all professional accountants through a robust, globally operable International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code).

The IESBA believes a single set of high-quality ethics standards enhances the quality and consistency of services provided by professional accountants, thus contributing to public trust and confidence in the accountancy profession. The IESBA sets its standards in the public interest with advice from the IESBA Consultative Advisory Group (CAG) and under the oversight of the Public Interest Oversight Board (PIOB).


Diane Jules

Former Director, IESBA

Diane Jules is a former director of the International Ethics Standards Board for Accountants (IESBA). Since assuming the role in 2016, Ms. Jules worked to advance IESBA's strategic goals and priorities. She was integral to developing ethics and independence standards for global application and works closely with the chair and the IESBA to promote awareness, use and adoption of the International Code of Ethics for Professional Accountants (including International Independence Standards). Ms. Jules’ responsibilities included building and strengthening IESBA’s relationships with its stakeholders which include investors, regulators, academics, firms and national standards setters. She oversaw IESBA’s operational activities, specifically in relation to its communication initiatives.

Ms. Jules was the key staff on the IESBA’s Non-Assurance Service Task Force and currently oversees the Board’s workstreams on technology and sustainability. Following the successful development and June 2019 launch of the IESBA eCode — a digital platform for accessing and navigating the IESBA Code. Prior to joining the IESBA, Ms. Jules was a Senior Technical Manager at the International Auditing and Assurance Standards Board, and before that an Assistant Chief Auditor at the U.S. Public Company Accounting Oversight Board (PCAOB). Prior to her career in standard-setting, Ms. Jules held various audit and professional practice positions, including as an Assurance Manager at Grant Thornton, LLP.

Ms. Jules was among the 77 women listed as Crain’s New York Business 2019 Notable Women in Accounting and Consulting. She is an active member of the New York State Society of CPAs and the American Institute of CPAs. Ms. Jules has been featured in industry publications, including the Strategic Finance Magazine and the Journal of Accountancy. She conducts editorial reviews on technical submissions to the Advances in Accounting Education: Teaching and Curriculum Innovations Series and the CPA Journal She holds a Bachelor of Science degree in Accounting and Finance from the University of Maryland College Park and is a licensed certified public accountant (CPA). She is also a chartered global management accountant (CGMA).

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Szilvia Sramko

Principal, IESBA

Szilvia Sramko joined the technical team of the International Ethics Standards Board for Accountants (IESBA) in February 2018. She currently leads Work Stream 1 – Independence Standards for Sustainability Assurance of the Sustainability Task Force. Previously, she provided technical support to other IESBA’s workstreams, such as the Engagement Team/ Group Audits, Fees and Non-Assurance Services projects, and the Benchmarking initiative.

Prior to joining the IESBA, Ms. Sramko was Deputy Head of Department at the Auditors’ Public Oversight Authority in Hungary (Budapest). Before that, she served in several roles at the Ministry for National Economy in Hungary and participated in preparing legislative proposals to transpose the amendments to the European Union’s Accounting and Audit Directives into the national law.

Ms. Sramko holds a Doctor of Law degree from Eotvos Lorand University (Budapest, Hungary) along with a Master 1 degree in comparative law from Université Paris II Pathéon-Assas and Eotvos Lorand University (Paris, France / Budapest, Hungary).